The Market Today
Weak China Growth Weighs on Equities, While Brexit Hopes Lift Bond Yields
by Craig Dismuke, Dudley Carter
TODAY’S ECONOMIC CALENDAR
Quiet End to a Downbeat Data Week: This week’s economic calendar should end on a relatively quiet note, with the Conference Board’s leading index set to be released at 9 a.m. CT and three Fedspeakers scheduled to speak before lunch. Dallas Fed President Kaplan will make remarks at 8 a.m. CT and will be followed by two current-year voters, Kansas City’s President George and Fed Vice Chair Clarida, at 9:05 a.m. and 10:30 a.m., respectively. Clarida’s comments will be the Fed’s last opportunity to adjust market expectations for an October rate cut before officials enter the quiet period ahead of the meeting later this month.
YESTERDAY’S TRADING ACTIVITY
Equites Rose Despite More Soft Economic Data: Despite another round of soft economic data, U.S. equities and Treasury yields rose modestly Thursday as positive corporate earnings continued, Brexit negotiators reached an agreement, and comments from leaders of both U.S. political parties sounded upbeat on the chances for passage of the USMCA. A poor performance by shares of IBM limited the Dow’s gain to just 0.09%, while the S&P 500 finished with a stronger 0.3% on broader strength across every other sector outside of technology.
Brexit Deal Still Faces Uphill Battle: U.K. yields and the British pound entirely retraced a sharp surge that occurred after the Brexit deal was announced as reminders quickly emerged that Johnson faces a steep uphill battle in parliament. The currency recovered to gain 0.5%, however, on hopes PM Johnson can whip up enough support to push the deal through parliament. In addition to firmer stocks and hope for a Brexit breakthrough, yields were helped higher by positive tone on trade. White House adviser Kudlow said he thinks the USMC can be passed before Thanksgiving and credited Speaker Pelosi with being “cooperative, accessible, accommodative, and helpful” throughout the process. Pelosi said “we are not there yet” on USMCA but she is optimistic about a positive outcome. The 2-year Treasury yield added 1.6 bps to 1.60% while the 10-year yield rose 1.2 bps to 1.75%.
OVERNIGHT TRADING ACTIVITY
China’s Economy Slowed More Than Expected: Global equities are mixed Friday with European markets and U.S. futures little changed while China’s major indices led declines in a generally downbeat day on the Asian continent. The slowdown for China’s economy in recent months was slightly worse than expected compared with a year ago. The economy grew 6.0% in the third quarter compared with the same period in 2018, less than the 6.1% economists expected and the slowest pace since the early 1990s. China’s CSI 300 dropped 1.4% while Europe’s Stoxx 600 and U.S. futures held cautiously around unchanged.
Brexit Hopes Lift Global Bond Yields: Bonds were less affected by China’s disappointing growth figures and U.K. Gilts were leading a general uptick in global sovereign yields. Positive progress toward a Brexit breakthrough since last week has pushed European yields and the British pound higher in recent sessions. While yesterday’s swings in U.K. assets after a deal was announced show the uncertainty that remains, PM Johnson is back in London Friday attempting to rally the troops. Parliament has been called to work Saturday to hold a vote that will determine if the deal will move forward, or if PM Johnson could be forced to seek another extension. Around 7:15 a.m. CT, the U.K. 10-year yield was 5.1 bps higher and near its highs of the day. Just before 8 a.m., the 2-year and 10-year Treasury yields had drifted back down and were both around 0.6 bps lower.
Auto Activity Exacerbates Soft Manufacturing: Industrial production fell more than expected in September as an unexpectedly large decline in manufacturing output weighed and a drop in mining output offset a solid gain for utilities. The Fed’s release did, however, single out “a strike at a major manufacturer of motor vehicles,” (i.e. GM), as driving a notable portion of the decline in manufacturing. Excluding the effects of a large drop in auto-related production, both industrial production’s 0.4% drop and manufacturing’s 0.5% decline would have been a less-severe 0.2% dip; disappointing still, but not as severe as the headline implied. Manufacturing continues to face global headwinds as evidenced by recent sentiment surveys, although the data has stabilized somewhat relative to earlier in the year. Manufacturing output rose at an annualized 1.1% rate in 3Q compared to a 3.1% decline in 2Q.